A married couple claimed exemptions in several annuity contracts in their Chapter 7 bankruptcy case. The trustee objected under state law, arguing that the debtors were only allowed to exempt a maximum of $250 in monthly payments from the annuities. The court disagreed, finding that state law gives it the authority to exempt the total amount of the annuity payments. In re Nichols, No. 14-60974-7, mem. dec. (Bankr. D. Mont., Jan. 12, 2015). Although the court applied Montana law in reaching its decision, California law has similar provisions that apply in bankruptcy cases.

The debtors filed for Chapter 7 bankruptcy in August 2014. They stated that the husband is retired and the wife is unemployed, and that they have total monthly income of just over $3,000. The monthly expenses listed in the debtors’ Schedule J was reportedly only $3.96 less than their stated income. The debtors’ income came from social security, VA disability, and five annuity contracts, according to the court. The husband inherited six annuity contracts from his mother. Their original monthly payment amount was $1,442.98. At the time of the bankruptcy court’s order, only five of the annuity contracts remained. One of them will continue payments for the husband’s lifetime, and the other three will continue payments until January 2016.

The trustee objected to the debtors’ claimed exemption of the annuity contracts, citing a state law provision that limits this sort of exemption to $250. Mont. Code § 33-15-514(1)(b). The trustee conceded that $250 of the monthly annuity payments were subject to exemption, but she argued that the remainder were not. She also claimed that a provision increasing the exemption amount to $350, found in § 33-15-415(1)(c), did not apply because the annuity contracts were the property of the bankruptcy estate. The trustee argued in the alternative that the husband’s monthly social security and VA income were greater than his one-half share of the debtors’ monthly expenses, and that the court therefore should not allow exemption of more than $250 of the annuity payments.
The court overruled the trustee’s objections, noting that § 33-15-514(1)(c) requires it to give “due regard for the reasonable requirements of the judgment debtor and the debtor’s family.” It cited a prior decision that found a “safe harbor” provision in this section of the statute giving the court discretion to exempt more than the $350 limit. California law, by comparison, allows exemption of certain types of annuity contracts, along with other assets providing periodic income, “to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.” Cal. Civ. Pro. Code § 703.140(b)(10)(E).

The court reviewed the debtors’ assets and expenses and noted that their expenses will exceed their available income if only one of the annuity contracts expires. It also noted that the trustee agreed that the debtors’ expenses are reasonable, and it found that the debtors actually understated their expenses. Disallowing or reducing exemption of the annuity contracts, the court found, would create an unjust hardship for the debtors.

Since 1997, bankruptcy attorney Devin Sawdayi has represented individuals and families in the Los Angeles and surrounding area who find themselves in financial distress, without the ability to pay their debts with their available income. We help our clients rebuild their finances through the Chapter 7 and Chapter 13 bankruptcy processes with dignity and respect. To schedule a free and confidential consultation, contact us today online or at (310) 475-939.